Why Fixed Charges Offer Stronger Protection than Floating Charges
UNDERSTANDING SECURITY IN BUSINESS FINANCE
When lenders provide finance to businesses, particularly in the UK, they often require security over company assets. This security helps ensure that if a borrower defaults, the lender has a legal claim over certain assets to recover outstanding debt.
Two of the most common forms of security used in commercial lending are fixed charges and floating charges. While both provide lenders with protection, they operate very differently in practice and offer different levels of control and priority if a business becomes insolvent.
Understanding the distinction between these two types of security is essential for business owners who are negotiating lending arrangements or reviewing existing borrowing structures.
What this means in practice:
The type of charge attached to a loan can significantly affect how much flexibility a business has over its assets and how creditors are treated if financial difficulties arise.
WHAT IS A FIXED CHARGE?
A fixed charge is a form of security granted over a specific, identifiable asset. Common examples include commercial property, machinery, or other long-term business assets.
When a fixed charge is in place, the borrower typically cannot sell, transfer or dispose of the asset without the lender’s consent. The lender therefore maintains a high degree of control over the secured asset throughout the life of the loan. From a lender’s perspective, this provides strong protection. If the borrower defaults or becomes insolvent, the lender holding the fixed charge generally has first priority over the proceeds of that asset. Because of this strong legal position, fixed charges are widely used in secured lending arrangements across the UK.
What this means in practice:
Granting a fixed charge can improve access to finance or reduce borrowing costs, but it also restricts how freely a business can deal with the secured asset.
WHAT IS A FLOATING CHARGE?
A floating charge operates very differently. Rather than attaching to a single asset, it applies to a class of assets that may change over time.
Typical examples include:
inventory or stock
trade receivables
cash balances
other circulating business assets
The key feature of a floating charge is flexibility. Businesses can continue using, selling or replacing those assets in the normal course of trading without needing the lender’s consent.
However, this flexibility comes at a cost. If a company becomes insolvent or defaults on its loan, the floating charge will usually “crystallise”, converting into a fixed charge over the remaining assets in that category. By that stage, however, the value of those assets may already have changed significantly.
What this means in practice:
Floating charges allow businesses to operate normally with working capital assets, but they offer lenders less certainty about the value available if insolvency occurs.
WHY FIXED CHARGES PROVIDE STRONGER PROTECTION
From a legal and financial perspective, fixed charges are generally considered stronger security than floating charges.
The primary reason is priority and control.
A lender holding a fixed charge typically ranks ahead of most other creditors when the secured asset is sold during insolvency. By contrast, floating charge holders must wait behind certain other claims, including preferential creditors.
In addition, lenders with fixed charges maintain greater control over the asset itself, reducing the risk that its value will diminish before enforcement. This distinction has been reinforced through UK insolvency legislation and case law, where courts have repeatedly examined whether a charge truly qualifies as fixed or should instead be treated as floating.
What this means in practice:
Businesses may find that lenders prefer fixed charges wherever possible, as they provide stronger protection and clearer recovery rights.
INSOLVENCY PRIORITY AND RECENT BUSINESS EXAMPLES
Recent corporate failures have highlighted the practical importance of charge structures.
During insolvencies such as the collapse of Wilko in 2023 and the earlier administration of Carillion, lenders with secured positions were able to recover value from specific assets before unsecured creditors received distributions.
In these situations, lenders with fixed charges over property or infrastructure assets typically stood in a stronger position than creditors relying solely on floating charges over stock or receivables. UK insolvency rules also require a portion of assets subject to floating charges to be allocated to unsecured creditors through what is known as the “prescribed part.” This further reduces the amount available to floating charge holders. As a result, lenders generally view floating charges as secondary security, often combined with fixed charges wherever possible.
What this means in practice:
The structure of secured lending can directly influence how creditors recover funds if a business enters administration or liquidation.
PRACTICAL CONSIDERATIONS WHEN AGREEING SECURITY
For business owners negotiating finance arrangements, the balance between flexibility and security is important.
Lenders will typically seek fixed charges over high-value, stable assets, while floating charges are used to cover assets that must move through the business while trading.
When reviewing loan agreements, business owners may wish to consider the following:
which assets are subject to fixed charges
how those restrictions affect day-to-day operations
whether future financing could be limited by existing security arrangements
how the charge structure may affect other creditors or investors
whether legal advice has been taken before granting security
Understanding these factors can help businesses structure financing in a way that supports growth while maintaining operational flexibility.
CONCLUSION
Both fixed and floating charges play an important role in UK business finance, but they offer very different levels of protection.
Fixed charges provide lenders with clear priority, stronger legal rights and greater control over specific assets, which is why they are often considered the most robust form of security. Floating charges, by contrast, provide flexibility for businesses but typically sit lower in the creditor hierarchy during insolvency.
What this means in practice:
For business owners seeking finance, understanding how these security structures work can make a meaningful difference when negotiating loan terms and planning long-term financial strategy.
If you would like guidance on reviewing your lending structures or understanding how security arrangements affect your business, the VOSCAP team would be happy to assist.
📧 Email: info@voscap.com
🌐 Website: www.voscap.com
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